Is Stamp Duty really to blame for the housing crisis?

PUBLISHED: 17:00 09 August 2017 | UPDATED: 15:15 10 August 2017

Chancellor of the Exchequer Philip Hammond came under fire from an anonymous member of his party demanding he 'deal' with stamp duty

Chancellor of the Exchequer Philip Hammond came under fire from an anonymous member of his party demanding he 'deal' with stamp duty

PA Wire/PA Images

A Conservative MP has started a scrap over scrapping stamp duty. But would ditching the tax help get people – and the market – moving again?

An anonymous Conservative MP has slammed stamp duty in an interview with the Telegraph.

The Cabinet minister said: “It is a big transaction tax and that has a big implication in terms of economic growth - it is stopping people moving.”

They put pressure on Chancellor Philip Hammond to ‘deal’ with the tax, which they believe is exacerbating the UK housing crisis.

The comments coincide with a new report that claimed removing stamp duty would increase the rate of people moving house by 27 per cent.

The analysis was undertaken by The London School of Economics and the VATT Institute for Economic Research.

Professor Christian Haber, who co-authored the report, said:

“The key message of our paper is that stamp duty hampers mobility significantly.

“If you are a young family and you have an additional child, you’ll need an additional room, but the stamp duty is discouraging this kind of move because of the additional cost and lack of available homes to move into.

“In a nutshell, the stamp duty discourages the elderly from downsizing and young expanding families from moving to more adequate larger housing.”

A Treasury spokesperson said: “Almost 90 per cent of people want to own a home, but only 63 per cent do. We reformed property taxes including stamp duty to help more people get onto the property ladder.”

The changes introduced by the then-Chancellor George Osborne in December 2014 swapped the ‘slab’ system for the ‘slice’ system.

The new regime was heralded as fairer, as it charges a different rate of tax to each ‘slice’ of the property’s value, rather than a flat fee according to price bands.

In April 2017 an additional 3 per cent surcharge was introduced for purchases made on additional properties. The move explicitly targeted second home purchasers, investors and buy-to-let landlords.

Buying agent Henry Pryor has hit back at the paper for running the story, saying journalists should ‘stick to the day job’ rather than elaborate on tax policy.

“I’m not surprised that the un-named Cabinet minister was too embarrassed to step forward and be identified in the Daily Telegraph piece this morning,” he told the Ham & High.

“Thanks to Private Eye we know just how many of our law makers are landlords many of whom have been hit hard by changes brought in by the last Conservative and coalition Governments.”

He noted that the current system of stamp duty has made it cheaper for 95 per cent of buyers.

“The higher rate tax introduced last year was a political effort to cap rampant house price inflation and deter second home buyers in favour of those trying to buy a home of their own, something that has been achieved so far without the predicted fall in tax revenues.”

In April this year HM Revenue and Customs announced that they had received £11.7 billion in tax on transactions from residential and commercial properties, up from £10.7 billion from the previous period.

However, this figure included purchases that were rushed through in an attempt to beat the April 2016 changes, causing a spike in transactions.

So has stamp duty really put a stopper in the housing market?

In areas such as Hampstead and Highgate where property is desirable and expensive, it has undoubtedly proved a sticking point.

“It’s not the sole reason [transactions have fallen], but it’s probably the biggest reason, certainly for £2 million plus properties, which for our area is significant,” said Jon Hughes, managing director of Benham & Reeves.

“The reality is that property prices at £2 million to £2.5 million have been hurt because of stamp duty changes. The further up the market you go the more difficult it becomes for people,” he added.

“With houses at £5 million, for instance, people have to find another half a million pounds plus in terms of stamp duty and it is absolutely crucifying that element of the market.”

Mr Hughes has noticed that sellers looking to downsize from homes in the £4 million to £6 million bracket are struggling to achieve the prices they would have a couple of years ago, with knock on effects for the housing ladder.

The 3 per cent surcharge on additional properties has compounded the problem in an area that is attractive to buyers who have multiple properties in their portfolio.

The additional rate has seen many prospective buyers opt to rent rather than buy high value properties whilst they wait to see which way the market goes.

The current market combined with the tax system has also made it financially viable for downsizers to hang on to larger properties rather than sell and swap.

Softening prices mean those whose property assets have accrued serious value in the past decades are unwilling to sell in the current market, where properties have to be discounted to attract attention.

“There is EVERY incentive to hoard housing. Makes absolute financial sense to remain in massive house alone as value rises, no tax downside,” tweeted journalist and financial commentator Annie Shaw.

For those pensioners living outside of prime London postcodes, the stamp duty rates are much lower. It’s still a factor for downsizers, but perhaps not the most significant one.

“Most pensioners live in ‘average priced’ homes, well below the values mentioned in the Telegraph article on stamp duty,” tweeted residential property analyst Neal Hudson.

He believes the biggest barrier to downsizing is the lack of appropriate homes that would make moving worthwhile.

He added: “There’s very little financial incentive to downsize for someone living in an ‘average priced’ home, even if you were to remove stamp duty.”

Scrapping stamp duty might get the upper echelons of the market moving again, but it would not address the underlying problems of housing supply, affordable homes, and wages that have failed to keep pace with house price inflation.

Opinion is very much divided on how to solve stamp duty – or whether it’s worth solving at all.

Chief executive of the TaxPayers’ Alliance John O’Connell spoke out in favour of losing the levy.

“This pernicious tax prevents younger people from getting on the housing ladder, and stops older people downsizing to more manageable homes,” he said.

“Brits are struggling under the heaviest tax burden in 30 years, and this is in part because the UK has the highest property taxes in the developed world.

If the government wanted to help people to buy their own homes and get on in life, they should scrap this relic of a tax completely.”

Mr Hughes is sceptical of the Treasury ditching stamp duty altogether.

“I’d like to see it reformed, as it’s having an effect on my business,” he said.

“It’s a terribly easy tax for the government to collect. They don’t even have to ask for it, it’s just sent to them. So the chances of it being scrapped I think are slim.”

Despite his own business suffering as a result of the changes, Mr Pryor believes it is a fair price to pay for cooling the market.

“Double-digit inflation couldn’t and shouldn’t have continued forever, interest rates have less impact in a market where 40 per cent of buyers are ‘cash’ and the idea that those buying multiple homes should be able to do so anything other than as expensively as owner-occupiers is not something that I want to see encouraged.”

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